Solar rising
SunPower's result shows that the gap between solar and fossil fuels is rapidly narrowing. Plus, EnerNOC's data-driven powers.
Download PDFLast week saw SunPower Corp report a very strong end to its 2010 financial year. Sunpower is the second largest listed solar project developer in the world and achieved a number of milestones in 2010 that illustrate the rapid transformation underway in the solar industry in terms of cost reductions, energy efficiency gains, scale of projects undertaken and improved profitability.
SunPower reported a 49 per cent growth in revenue in 2010 to $US2.22 billion. Net income grew 400 per cent to $US179 million for the year; a result that was double market expectations. Profit growth was driven by a combination of very strong revenue growth and improved margins. The company reported a gross margin of 23 per cent for 2010, a 440 basis point increase from the 18.6 per cent reported in 2009. It spent $US49 million on solar research & development (R&D), a whopping 55 per cent increase on the 2009 R&D level.
At the start of 2010, SunPower announced a major strategic shift with the $US450 million acquisition of Sunray Renewable Ventures, a private project development firm based in Italy. This acquisition allowed Sunpower to become significantly more vertically integrated, extending its focus from manufacturing high-efficiency solar modules through to the development and financing of solar projects.
In December 2010, SunPower opened its latest solar module manufacturing plant, a greenfield facility that can produce 1.4 gigawatts (GW) of solar modules annually. This new facility puts into commercial production SunPower’s high conversion efficiency solar modules, with a world-leading 22.5 per cent conversion efficiency. This is double the efficiency of rival First Solar, the world’s leading thin-film solar module manufacturer. Sunpower modules are also 20 to 30 per cent more efficient than the leading Chinese solar module manufacturers.
Conversion efficiency is half of the equation for solar installations, with the cost per module the other half. Sunpower has achieved a 30 per cent reduction in capital cost per watt in the last two years. Cost per watt is forecast by management to fall another 10 per cent pa over the next three years – driven by economies-of-scale and further technological innovation.
Another company milestone was the 5 GW order book that SunPower reported at the end of 2010. To put this in perspective, this single company’s orderbook currently represents more than the entire installations of solar modules made around the world in 2008! Additionally, during January, Sunpower reported that it had signed a contract with Southern California Edison for the construction of three American solar utility projects, with a combined capacity of 711 MW. To give this some perspective, First Solar announced in October 2010 that it had completed the world’s then-largest solar project at 80 MW in Ontario, Canada.
We are fully aware that, in the absence of a price on carbon pollution, solar remains a high cost source of electricity. However, with electricity prices forecast to rise significantly over the next few years, and with solar cost reductions continuing to track at greater than 10 per cent per annum, solar is rapidly narrowing the gap on fossil fuel energies.
Although China and America have been laggards in the installation of solar capacity in recent years, Arkx expects both countries to double annual capacity installed in each of 2011 and 2012. This should underpin a move to distributed energy cost parity in sunny regions by 2013 to 2015.
Given this last comment, it stands to reason that we at Arkx believe that the Australian Solar Flagships program is a critical investment. For the last decade, Australia has been a world leader in solar R&D. Sadly, however, the vast majority of this intellectual treasure trove has needed to have been commercialised offshore. Through Solar Flagships, the implementation of commercial, utility-scale solar projects will help Australia regain some of its lost leadership in this rapidly emerging new industry. It will also bring much needed commercial, technical and financial experience to the excellent work of Australian universities in the solar field.
Efficient result
Turning to the field of energy efficiency, the 2010 results for EnerNOC (US) make for interesting reading. EnerNOC is a world-leading company operating in the area of demand-response management. While its main service does not deliver any reduction in carbon emissions or fuel efficiency, EnerNOC does deliver a dramatically more capital-efficient electricity generating model.
EnerNOC contracts with its power generating utilities to deliver a stated reduction in power demand should there be a spike in electricity demand. This reduced energy demand commitment then allows the generator to avoid the need to maintain peak energy capacity. Peaking capacity is very expensive to maintain, largely given that the last 10 per cent of a national power generating capacity is utilised as little as 1 per cent of the year – due to it being turned on for short periods, for example to deal with extra demand experienced during a heat wave.
This service was well tested in 2009, when EnerNOC delivered massive energy demand reductions to help utilities manage an extreme weather event that unexpectedly took out massive amounts of the American baseload generating capacity. The US Department of Energy has estimated that North America invests $US10.6 billion new capital annually for peaking capacity purposes.
EnerNOC, by contrast, seeks out customers who will agree to reduce their short-term power usage by a defined amount for a short period immediately on request. This can be as simple as turning down the airconditioning settings or reducing peripheral lighting, activating a back-up generator, but can also be as dramatic as agreeing to manufacturing plant shutdowns in extreme circumstances. EnerNOC charges the utility and shares the revenue with the end-use customers.
EnerNOC was created in 2003 and undertook an initial public offering in 2007. End customer sites under management have grown from 1,000 at the start of 2007 to 4,000 at the end of 2008, rising to 8,600 sites by end 2010. EnerNOC now has 5,300 Megawatts of US energy capacity under management (up 49 per cent year-on-year). EnerNOC reported 2010 revenues of $US280 million, up 47 per cent on 2009 levels. Revenues have grown by a compound 65 per cent per annum since 2007 and in 2010 EnerNOC reported its maiden profit result of $US10 million.
The real power of EnerNOC to help drive energy efficiency lies in the data collection and analysis it undertakes in the process of implementing its core business. EnerNOC studies end customers’ energy usage patterns, and then is ideally positioned to provide consultation programs to permanently improve energy efficiency. EnerNOC expects to deliver 20 per cent of its revenues from energy efficiency programs in the medium term.
Tim Buckley is a managing director and portfolio manager at Arkx Investment Management.
Disclaimer: Arkx Investment Management (Ark – x) focuses its investment approach on a small portfolio of high conviction stocks in the listed global cleantech universe. It looks for proven performers with world leading technologies backed by strong balance sheets and priced on sensible valuation metrics. While Arkx holds a long position in Sunpower, nothing in this article should in any way be considered as investment advice.